Over the last few weeks, I have been paying attention to some of the new Dodd-Frank rules that have come out. I have read some summaries and have attended a couple of lectures on the issue, but I have yet to sit down and read the regulations word for word. I expect the regulations will provide insights that some of the summaries glossed over.

At the same time in which I was reviewing the Dodd-Frank summaries, a case came across my desk in which I had to do some additional research. It involved discrimination issues in consumer lending on a residential mortgage.

My eyes were opened by some

of the things out there of which

I had been previously unaware.

One of the biggest “ah-ha” moments came when reading a portion of the CFR (Code of Federal Regulations) which indicated that a lender did not need to have the intent to discriminate in order to be guilty of committing discrimination in a residential lending situation. If they caused the “discriminatory effects,” then that was enough.

Although there has been some variation in the application of the discriminatory effects’ standard, neither HUD nor any federal court has ever determined that liability under the Act requires a finding of discriminatory intent.

The foregoing statements should cause all real estate investors who deal with residential end-buyer, owner-occupants to pause and reconsider everything they are

doing in their businesses to see if what they are doing is having

a discriminatory effect.

This is by no means the complete solution, and it is not enough to fix every situation, but the first thing to remember is that EVERYONE wanting to apply for a rent-to-own, lease option, “Lonnie deal”, owner finance, or loan modification should be permitted to complete the application whenever they ask to do so.

Secondly, EVERYONE should be given the same type of application for the same type of transaction.

Bottom line, be careful of how you approach any transaction. Treat everyone the same. If needed use a licensed loan originator as needed and……..check with counsel . to make sure you are doing it in a systematic, consistent way.

This important legal document should be kept in a safe place, and here is why!

The promissory note is a promise to pay or IOU from the property buyer. It spells out the amount due and terms of repayment. In legal jargon it is known as a negotiable instrument. Similar to a check, the original must be presented to collect or prove ownership.

If the seller desires to sell and assign the payments to a note buyer, the investor will ask for the original note to be provided at closing. The promissory note is then endorsed over to the investor. Similar to endorsing a check, the holder signs on the back of the note.

Sample Note Endorsement on Back of Original Mortgage Note

Pay to the order of, (Insert name of investor), without recourse.

Dated this ____ day of _______, 2011.

(Seller Signs and Dates)

Sometimes the note endorsement is executed on a separate piece of paper, also called an allonge. The allonge is then attached as a permanent rider to the original note. The endorsement enables the investor to prove they are a holder in due course, with the same rights of repayment as the original note holder.

An investor may also ask for the original recorded mortgage or deed of trust at closing. However, if this original is lost, an investor will usually accept a certified copy from the county recorder’s office.

A lost original note, on the other hand, can cause a problem. In most states the note is not recorded. If the original note becomes lost a note investor may ask for a duplicate or replacement note to be signed by the payer or maker. This means going back to the person that owes you money and asking them to resign. This relies on their cooperation and can cause delays.

The investor will also ask for a lost note affidavit from the seller or note holder, stating the note has been lost and it will be presented if found at a later date.

Some investors will consider accepting just the lost note affidavit with a copy of the original note. However, this is increasingly rare as a lost original note can create problems foreclosing should the buyer stop making payments.

The best option is to avoid losing the note by keeping it in a safe deposit box or a fire and waterproof safe. Some sellers elect to have the original held by their attorney or a third party servicing agent for safekeeping.

Whatever method you choose, be sure to keep the original mortgage note in a safe place that is easily located!

Want top dollar when selling mortgage notes?

Increase the value with payment histories!

Keeping an accurate record of the payments received on a mortgage note is essential for knowing how much the buyer still owes. This also establishes a record of their payment habits – with an added benefit.

The value of a note can be improved by presenting note buyers a verifiable payment history!

There are two main ways to keep track of payments on seller-financed mortgage notes: 1) outside serviced, or 2) seller direct.

Professional Mortgage Note Servicing

The first and easiest is to let a professional handle it. The payments are made to a third party servicing agent that keeps track of the balance and sends the money along to the seller. They will also send out the annual 1098 Mortgage Interest Statements and can hold original documents in safe keeping.

The DIY Approach to Collecting Payments

If a seller chooses the “Do-It-Yourself”’ method over a third party pro they will need to follow these steps:

1. Place original note and other original documents in a safe deposit box.

2. Make a copy of each check or money ordered received. Accepting cash is not recommended since it is hard to verify the payment history without a paper trail.

3. Deposit the payment and keep a copy of the bank record of deposit. It is best to deposit each payment separately rather than combining with other checks.

4. Create a ledger or spreadsheet reflecting the date and amount of payments received.

5. Calculate the amount applied to interest, principal, late fees (if any), and the resulting principal balance. An amortization schedule or financial calculator can be helpful. Once calculated, record in the ledger.

6. Send out an annual statement to the buyer or payer along with the IRS1098 Mortgage Interest Statement.

7. Verify the real estate taxes and property insurance are being kept current. Consider establishing a tax and insurance escrow where the buyer pays 1/12th of the annual amount into a reserve account each month.

Why Note Buyers Want Payment Histories

When an investor agrees to purchase a note they will request a payment history. A verifiable payment history can improve the value of a note as it provides proof of timely payments. A payment history is considered verified when it is either provided by a third party or is backed up by the documents and records outlined above.

Unfortunately many sellers fail to keep track of the payments received. When they go to sell the note, contract, or trust deed they try to recreate the history from memory. Without any proof of payments received, a note buyer has to go on faith. Sometimes a payment history affidavit can substitute for a payment record but it still doesn’t add the value of verifiable proof.

Protect the value of your mortgage note! Set up a payment tracking method today.

A buyer failing to make payments on the mortgage note isn’t your only worry.

Understandably, a buyer that stops making payments is a major concern when using owner financing. After all, a seller-financed note is a very valuable asset.

Unfortunately many sellers fail to protect their asset when it comes to another area…verifying current property insurance and taxes.

Next to delinquent payments, the most common default by buyers is failure to keep the property insured and the real estate taxes current.

In fact many buyers will make their monthly note payments but fail to pay the insurance premium or real estate tax installment.

Sadly, a lapse in insurance can be devastating to both the buyer and the seller. If the property burns down and is not insured, the seller will probably never see another payment from the buyer.

If a buyer fails to pay the real estate taxes for long enough the county can actually foreclose on the property. In most states, the lien for county taxes even takes priority over mortgage note holders, leaving an unsuspecting seller high and dry.

The solution?

Verify the insurance and taxes are current and require the buyer to submit proof!

For insurance, require a copy of the declaration page showing the buyer as the insured owner and the seller as the insured mortgagee. Next call the insurance company to verify the policy is current and the annual premium has been paid. As the mortgagee listed on the policy you should receive notice of cancellation but it is safer to verify on or before the date premiums are due from the buyer.

To verify taxes are current simply check the county records using the property address or tax parcel identification number. This can be done with a phone call, a visit to the county tax assessor, or online.

Most documents require the buyer to keep taxes and insurance current and failure to do so qualifies as default under the note. Sellers can demand the default is immediately cured or start foreclosure.

Sellers as lien holders may also elect to pay the delinquent amount to protect their interest and add back to the amount due, depending on the terms of the actual note, mortgage, deed of trust, or contract.

Some sellers prefer to avoid the headache by setting up reserves through a third party servicing agent. This way the buyer pays an amount equal to 1/12th the annual amount for taxes and insurance establishing an escrow reserve account from which the bills can be paid.

A note buyer will also verify the taxes and insurance are current should the note holder ever decide to sell the mortgage note, trust deed, or contract.

Whatever the method, smart sellers know to protect their valuable asset by verifying the real estate taxes and hazard insurance are being kept current on the property!